ABSTRACT Hedgehog signaling is a means of intercellular communication that, in vertebrates, relies on immotile cellular appendages called primary cilia. In our previous work, we discovered that vertebrate Hedgehog signals move Smoothened to primary cilia, that this movement is necessary for Smoothened activity, and that certain cancers depend on their cilia for constitutively active Hedgehog pathway activity. Despite these insights into Hedgehog signaling, how Smoothened movement to cilia is regulated and how ciliary Smoothened activates the downstream pathway remain unclear. In this renewal application, we examine the molecular mechanisms by which the Hedgehog receptor, Patched1, controls Smoothened activity (Aim 1), how Smoothened is activated within the cilium (Aim 2), and how Smoothened activates its downstream effector, the transcription factor GLI2 (Aim 3). We have discovered that the ciliary membrane has a unique lipid composition, and that specific ciliary lipids are necessary and sufficient to activate mammalian Hedgehog signaling. Therefore, the first two aims focus, in part, on how Patched1 regulates ciliary lipids and how ciliary lipids control Smoothened activity. These experiments will help reveal how lipids control signaling, and may identify new therapeutic strategies for blocking Hedgehog pathway-related cancer formation. How Smoothened communicates to GLI2 remains unknown. We have created a biochemically tractable knock-in Gli2 allele that will allow us to uncover mechanisms by which cilia regulate GLI2 activity in embryogenesis and oncogenesis. Thus, the proposed experiments use a combination of mammalian genetic, cell biological, imaging and biochemical approaches to reveal how the Hedgehog signal transduction pathway uses cilia to transmit information, both in development and disease.